Why Westpac thinks RBA will hold cash rate until 2020

By Gerv Tacadena
28 Jan 2019

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While market watchers debate whether the Reserve Bank of Australia will cut or hike the official cash rate this year, economists at Westpac are taking a different perspective, saying that it is more likely that the rate will remain unchanged until 2020.

Westpac chief economist Bill Evans told Business Insider Australia that the Australian economy is a huge indicator of how the rate movement will play out in the coming months. While RBA is projecting above-trend growth, he foresees the opposite, with the Australian GDP slowing to below trend, unemployment rising, and the underlying inflation remaining stuck.

"If we thought the RBA was likely to lower its growth forecasts in 2019 and 2020 to 2.5% or less, then we would certainly expect it to adopt an easing bias," he said, arguing that the central bank will likely make modest revisions to its growth forecasts.

RBA is expected to forecast a 3% growth this year and in 2020, reflecting a restrained slowdown in housing construction and insignificant wealth effect. With these in mind, there is a strong likelihood that it will keep its view of a rate hike.

Evans said the recent levels of bank bill swap rate and the out-of-cycle rate hikes by some banks will influence the expectations of the market regarding the rate hike.

"The RBA will probably view those developments as likely to exacerbate housing price weakness but due to an insignificant wealth effect, will unlikely materially change their forecasts," he said.

RBA's thinking that the impact from a reduced wealth effect from the housing downturn will be minimal reinforces Evan's view that policy rates will remain stagnant.

"The key as to whether the Reserve Bank will placate markets and adopt a pure neutral bias by eliminating the ‘next move up’ in its commentary will hinge on how it reassesses its forecasts," he said.